Student full name

Student full name
Salimov Sherzod
Changwon National University
Master of Business administration


Research topic
Effect of Foreign direct investment on economic growth: do social and economic conditions of the country matter

Table of Contents

Research objective 8

Abstract

Foreign Direct Investment (FDI) is one of the primary drivers of economic growth, particularly in developing and emerging nations and it is a topic of discussion among government officials and academics. The main objective of this research paper is to examine how FDI affects economic growth under various economic as well as social settings using real-world data. The focus area of this study will consist of reviewing a panel data of 20 nations from year 2010 to 2021. In this study, a Mixed Fixed and Random panel data model will be used to assess the association between the following variables: FDI as a percentage of GDP, Real GDP per capita, and other social and macroeconomic variables such as trade rate as a measure of the country's openness and human capital. In this paper we identify variability in the link between investment and growth using the MFR estimator panel data model. The findings will reveal the factors that determine the amount of economic openness of a country's determinants and the factors that influence FDI, which in turn determines growth prospects.

keywords: FDI, trade openness, expansion of the economy, panel data model

Introduction

Foreign direct investment (FDI) is defined as the ownership of a business venture in one country by a company established in another country. It consists of the amount of equity capital, firm loans, new facility formation, and reinvesting revenue generated abroad.

Grazia Ietto-Gillies (2012), stated out that FDI is the comparably cheaper cost of manufacturing of goods in a company's foreign operation and economic potential growth of a host country, which is based on the classical theory of trade. According to the World Bank (2008), foreign direct investment flows peaked in year 2006 at about $ 1.2 trillion, with continued increases in both inflows and outflows, particularly in developing nations.

Factors that influence the inflow of foreign direct investment has substantial policy implications. For example, Investors of a foreign country can be attracted in foreign direct investment by using tax exemptions and subsidies. This can be considered as a positive outlook for emerging and developing countries, because FDI provides an additional inflow in capital investment, creation of additional employment possibilities which can lead to the number of skilled workers and adaptation of new technologies with increased productivity.

However according to the Herzer (2006), FDI might also have an adverse influence or a negative impact on emerging countries' economies. Based on his calculation the availability of international investors can cause reduction in local investors' investment capacity. For example, exchange of information withing the countries may not be possible or the company may obtain recourses and inputs from various merchant sources other than local vendors.

The findings of FDI influence on economic growth may appear ambiguous, resulting to debates in the empirical literature. According to some research scientists who studied the same research topic area derived that there is no link between economic growth and foreign direct investment, while other researchers found that an unconditional positive relationship between the two measures or identified specific macroeconomic or social factors in emerging economies that influence improvement, including human capital rate or financial system characteristics. Several factors can account for these differences. To begin with, some researchers used incorrectly the causality between variables in their regression analysis when conducting their research. To sum up all, in this research paper we will discuss all the aspects from different angle and according to our findings policy recommendation will be presented for future research papers or for developing countries.

Literature review

The question of what propels economic development in developing nations has been debated for decades. Economic growth is defined differently by different economists and academics. A rise in the "quality and quantity of the market" constitutes economic development, according to Schutz (2001). In recent years, foreign direct investment (FDI) has expanded in developing nations and economies.
Researchers have spoken a lot about this. Some claim that foreign direct investment has a large beneficial impact on the economy of a given nation, while others claim the inverse is true. For example, Li and Liu (2005) analyzed the "panel data of developing" nations and found that FDI had a negative impact on the development of emerging economies. Foreign Direct Investment (FDI) has been shown to increase economic development, according to Baharumshah and Thanoon (2006).
According to Nabil Md. Dabour (2000), foreign direct investment (FDI) has played a significant role in the global economy during the last two decades. Foreign direct investment (FDI) is a priority for these nations' policymakers, who are considering strategies to attract FDI in order to align it with the country's long-term economic goals. Table 1 shows how UNCTAD (2002) categorizes the factors affecting foreign direct investment (FDI).
Explanatory factors that Moosa and Cardak (2006) found to influence FDI inflows include "market size and wage rates, growth rate, cost of capital, and other variables" which can be directly linked to any theory. Data from 138 countries was analyzed using 8 different FDI-related determinants.
If FDI is equal to 0, then X + _(i=0)nj
A nation's FDI depends on another country's, Xj, the jth variable in the country I, where I is the country where the investments were made. Seven economic factors are included in their model. FDI, GDP growth, Wage, Trade Rate, Real Interest Rates, Inflation Rate, and Domestic Investment are all included in this list. During their research, they discovered that nations with a high degree of transparency and a low country rank well in terms of attracting foreign direct investment.
Some research use control variables to analyze the causality, while others use the other way around. In order to have a clearer perspective of what has already been written, this review will cover both methods.
For the period 1981 to 2001, Balasubramanyam et al. (1999, 1996) used an equation time averaged cross-section estimate technique to investigate 46 nations with rising economies. He discovered that nations with a greater emphasis on exports had a greater potential for growing the influence of FDI. In other words, trade openness, market size, competitive atmosphere, and capital all play an essential part in the country's economic success.
Borensztein, De Gregorio, and Lee (1995) investigated the effect of foreign direct investment (FDI) on the spread of technology from industrialized nations. Regression cross-country study was carried out across 69 developing nations between 1972 and 1982 and 1985 and 1992. They found a link between foreign direct investment (FDI) and economic development when the receiving nation had a greater level of human capital and education.
A second article by De Mello (1999) is focused on panel data, employing the mean group estimator (MGE) to apply homogeneity assumptions. For the years 1972 to 1992, his research focused on OECD nations. He found that the impact of foreign investment on a host country's economic performance is largely determined by the degree of replacement between foreign and local investment in that country.
Future economic development cannot be accurately predicted in emerging nations. According to Alfaro et al. (2004), he utilized cross-country data collected over the course of 20 years from 71 nations with varying levels of development to examine this problem. Financial markets have an important role in economic development fuelled by foreign direct investment, according to his research.
Between 1965 and 1997, Carkovic & Levine (2005) used a "Generalized method of moments panel data framework to examine 68 nations". A variety of factors, such as trade liberalization, financial depth, national wealth, and educational attainment, were taken into account in the econometric research. Economic development is not caused by foreign direct investment, according to the researchers.
From 1931-1998, Choe (2003) examined 80 nations using a panel VAR model to determine the relationship between economic growth and FDI. He came to the conclusion that growth and FDI have a mutually reinforcing impact. Chilean FDI studies by Chowdhury and Mavrotas (2005) have shown that GDP drives investment, not the other way around. When the post-structural correction program is implemented, the reverse happens.
Foreign Direct Investment (FDI) is attracted to countries with large markets that are expected to develop, according to a 2003 report by the International Monetary Fund. Corruption, governance, investment, and taxation all have an influence in the likelihood of a successful venture.
An empirical analysis of FDI flows to developing nations was conducted by Frenkel, Funke, and Stadtman (2004), who examined a database of bilateral FDI flows. In their analysis, they discovered that "GDP growth rate, risk, market size, and distance all have a role in the volume of FDI inflows". Risk and economic development are the most important variables in attracting foreign investment to emerging nations.
Unit labor costs, the size of the source nation, and the closeness of the source country are all factors that influence FDI in transition economies, according to Bevan and Estrin (2004). According to them, danger is not a serious consideration. Economic reasons were exploited to gain closeness. When they employed econometric model estimate, they discovered that the announcement of EU accession for nations with conversion economies attracts FDI. Economic geography and a vast market with cheap unit labor costs are to blame for this.
Macroeconomic factors affecting FDI were also examined by Nonnemberg and Mendonca (2004). A panel data study of 38 developing nations from 1980 to 2002 was utilized as the basis for the econometric model that was developed. They used education, the openness of the economy, and risk as macroeconomic drivers.
Turkey's foreign direct investment (FDI) was studied using the VAR model from 1995 to 2005. Real interest rates and consolidated budget balances were shown to be two of the most important factors in determining foreign direct investment (FDI).
Data from 14 Asian nations between 1985 and 2005 was used by Mercerau (2005) to quantify the effect of China's rise on FDI flows to Asia. Asian nations have benefited from macroeconomic characteristics such as solid government balances, an appreciated real exchange rate (real GDP), low inflation, and cheap interest rates, whereas China had little effect on FDI in other countries.
Researchers in several of these studies also look at the relationship between "FDI and economic" development in terms of the unique features of the countries they are studying. According to Zhang (2001), one of these studies was carried out between 1975 and 2000 on 11 emerging nations from East Asia and Latin America, which included China. The findings revealed Granger-causality between FDI and GDP. In addition, he noted the link between FDI and the state of the local economy.
Basu et al. (2003) performed a panel data study of 23 developing countries between 1980 and 1998 and found that the degree of liberalization influenced the relationship between economic development and foreign direct investment (FDI).
Hansen & Rand (2006) examined the Granger-causal connection between two variables in 31 developing nations between 1975 and 2005. According to their empirical analysis, foreign direct investment (FDI) has a significant influence on GDP via the transfer of knowledge and acceptance of new technologies. They also determined that a rise in GDP may be attributed to an increase in investment in gross capital creation.
Data from 28 countries between 1975 and 2005 from a heterogeneous panel by Herzer et al. (2006) indicated no correlation between foreign direct investment (FDI) and growth rates. Investing in the long term has little effect on economic development, according to the researchers.
Omran & Bolbol (2003) examine the relationship between the host country's characteristics and the effects of causal and control factors. Cross-country Granger-causal analysis was also used to examine the impact of FDI. – This means that in Arab nations, the influence of investment is more substantial in terms of development level if it is affected by financial issues. They argued that FDI should be pushed ahead as a result of domestic financial reform.
The mixed and random (MFR) panel data approach was used by Nair-Reichert and Weinhold (2000) to study 24 developing nations between 1979 and 1997. Foreign and local investments, as well as the country's openness and inflation, were examined by the researchers. It was shown that the link between growth and investment may be heterogeneous, and that more trade liberalization tend to expand quicker with FDI.
The purpose of this study is to enhance the research in several ways. Starting with developed and emerging nations, a broader view of the receiving country's characteristics will be taken into account. In addition, it spans a long period of time, from 1995 to 2014, and includes data that has been updated to reflect the most current trends in the globe. Research on the relationship between FDI and economic development in countries with certain features is made more dynamic by these elements.

Research question

Effect of Foreign direct investment on economic growth: do social and economic conditions of the country matter?